The Securities and Exchange Commission announced on Monday that it plan to take more time decide whether or not to approve a pair of proposed bitcoin cash exchange-traded funds.
These are funds that track the value of bitcoin, which investors could buy and sell on a traditional exchange, just like they do stocks.
The SEC is Wall Street’s watchdog — and whether it likes it or not, the agency spends a lot of time figuring out how to handle cryptocurrencies. This includes deciding whether it needs new bespoke regulations for crypto or whether it can stick with what it has been doing, which enforces laws that are already in place.
There are now thousands of cryptocurrencies and an entire ecosystem of companies that support everything from mining them to trading them.
“It’s become readily available to virtually every American,” said Chris McNamara, attorney at Barton LLP. This accessibility explains the growing concern about fraud.
“Even a bitcoin, for example, you could use to buy a Tesla, right? But with some of these other products, you can’t necessarily use those investments, just like you can’t use a mutual fund to buy a car,” he said.
To determine whether something is a security or a commodity, the SEC relies on a legal principle from the 1940s called Howey’s test.
The test has four criteria, according to Lee Reiners, executive director of the Global Financial Markets Center at Duke School of Law.
“An investment of money in a joint venture, with a reasonable expectation of profit. And that profit comes from the efforts of others,” Reiners said.
It is the last half that presents the critical test. If the SEC thinks there’s a key group of people making things work, that’s security, which needs a lot more risk disclosure. Reiners said that for now, this test is working as the SEC tries to control crypto.
But JW Verret of George Mason University said the industry deserved more specific guidance.
“And I think if you meet some crypto lawyers halfway through, they would be willing to help the SEC design something new,” Verret said, so there’s more clarity on what digital assets are are considered securities.